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Tax Resolution & Representation
Let YOUR Voice Be Heard! ®
Tax Crisis Center®, LLC
don't take care of our clients,
Voice Be Heard! ®
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For the most part, the Internal Revenue Service views the nonpayment of a tax obligation as a civil matter. The IRS will take everything you own to satisfy the debt, and they typically cannot pursue the matter criminally. However not paying payroll taxes is a different story. If you willingly did not pay your payroll taxes, the IRS can pursue criminal action against you. This week we will discuss why payroll taxes are different than other taxes, recent case law, and what you can do to avoid criminal action.
My company Tax Crisis Center®, LLC deals with a lot of businesses that fail to pay their payroll taxes. Typically these taxes are not paid because of cash flow issues that small businesses have. My advice to my clients is always to pay your payroll taxes first before you pay anything else.
During these economically troubled times there exists great economic pressure on businesses of all types and sizes. Cash flow short falls are increasingly common. One of the temptations, and indeed common business practices for businesses, is to reduce and defer the payments to some creditors in a desperate attempt to keep the business operational. Officers, directors, and other employees of a corporation are generally not liable for the legal obligations, including tax obligations, of their corporation. This is known as the “corporate shield” defense for such individual. In a corporation or limited liability company, you are generally only liable up to your investment in the company. That is one of the benefits to incorporating. Nevertheless, there is an exception to this general rule where an employer fails to properly withhold and remit the employee’s share of income taxes and employment taxes to the IRS and the officer or director, as the case may be, was in a position to prevent this from occurring. The failure to remit such Payroll Taxes to the IRS most often occurs when the corporation decides to use the Payroll Taxes as, in effect, a short‐term loan to pay off other creditors before the IRS.
Payroll taxes withheld from employee paychecks are the property of the U.S. government, and are held in trust by employers until such time as they are deposited with the government. If a business fails to deposit payroll taxes, the IRS will seek to recoup them from any “responsible person” of the employer, including officers, directors, owners, or bookkeepers with signature authority over a bank account. The personal liability of such individuals can be substantial, and can include criminal liability under IRC § 7202 of the Internal Revenue Code for “willful” failures to “collect, account for, and pay over” payroll taxes. Not paying over the taxes to the IRS is embezzling money from the United States Treasury.
Employers are required by law to withhold from their employees’ paychecks the employee’s share of Payroll Taxes. When this occurs, the employer is deemed to hold the withheld Payroll Taxes “in trust” for the IRS until such Payroll Taxes are remitted to the IRS. IRC § 6672, also known as the “Trust Fund Recovery Penalty,” subjects those persons considered responsible for the collection and payment of Payroll Taxes to personal liability when their employer fails to pay over the Payroll Taxes to the IRS. Although technically a penalty provision, the Trust Fund Recovery Penalty is used solely as a device to collect the amount of unpaid Payroll Taxes, not as a means of imposing an additional penalty over and above the outstanding corporate tax liability.
The Trust Fund Penalty is typically imposed by the IRS to secure the government’s interest they will assess the Trust Fund Penalty against ANYONE that was responsible for the payroll taxes not being paid. Typically this would be corporate officers, but could also be the bookkeeper of the corporation.
The IRS frequently chooses to pursue collection of unpaid “trust fund” taxes from officers and directors of a business. These individuals are the most likely to meet the two‐part culpability test that is required by the Trust Fund Recovery Penalty, including “responsibility” and “willfulness.” Accordingly, liability for the Trust Fund Recovery Penalty can occur only when an individual is determined to be a “responsible person” and his or her actions as it relates to the Payroll Taxes are considered “willful.”
The term “responsible person” is very broadly defined and includes employees, board of directors, shareholders, and others outside the formal corporate organization. The responsible person is, in general, any person who can effectively control the finances of the corporation or determine which bills should or should not be paid and when. The responsible person usually has the ability to sign checks on behalf of the corporation. Factors such as knowledge, delegation of authority, and the relative responsibility of others have little or no bearing on the finding of “responsibility.” As such, the “least” responsible person is no less liable for the unpaid trust fund taxes than the “most” responsible person. Consequently, the IRS can attempt to collect from any deemed responsible person it chooses.
Recovery Penalty is civil rather than criminal. Accordingly, it is not necessary for the IRS to prove that the failure to remit the Payroll Taxes resulted from an individual’s bad purpose or evil motive. Generally, the willfulness requirement is met if a responsible person: (1) knowingly pays other creditors (or allows creditors to be paid) instead of the IRS; or (2) recklessly disregards the obligation to pay the trust fund Payroll Taxes to the IRS.
IRC § 7202 is the criminal counterpart to the Trust Fund Recovery Penalty. IRC § 7202, entitled, “Willful failure to collect or pay over tax,” provides that “[a]ny person required under this title [26 of IRC] to collect, account for, any pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall . . . be guilty of a felony”
In a significant recent case, United States v. Easterday, 564 F.3d 1004 (9th Cir. 2009), the defendant, Jack E. Easterday, operated a chain of nursing homes in Northern California through a corporation and subsidiaries. Although the corporation’s payroll tax returns filed with the IRS accurately stated its tax liabilities, the defendant, through the corporation, repeatedly failed to payover to the IRS the full amount of Payroll Taxes due. When the corporation did not pay the outstanding payroll tax liability to the IRS, the IRS filed liens against the corporate accounts and eventually filed criminal charges.
The defendant, Mr. Easterly, did not dispute that he failed to pay the Payroll Taxes when due. Instead, Mr. Easterly’s defense was simply that under long established Ninth Circuit law in United States v. Poll, 521 F.2d 329 (9th Cir. 1975), the criminal element of “willfulness” did not exist (and, therefore, could not be proven by the government) because the corporation lacked the financial ability to comply with the corporation’s Payroll Tax obligations as a result of the trust fund taxes being used to pay other corporate bills in order to keep the nursing homes operational.
The Ninth Circuit in Easterly held, however, that the government is not required to prove the taxpayer defendant had sufficient funds to pay the taxes due in order to establish the “willfulness” element of an offense of willfully failing to pay employee Payroll Taxes in violation of IRC § 7202. In so holding, the Ninth Circuit overruled its prior decision in Poll (and relied upon by the defendant), which held that willfulness requires a showing that, at the time payment was due, the taxpayer had sufficient funds to enable him to meet his obligations or that the lack of sufficient funds on the date was created by, or was the result of, a voluntary and intentional act without justification in view of all the taxpayer’s financial circumstances. As a result, the defendant in Easterly was convicted of a felony for failing to remit Payroll Taxes to the IRS.
Employers experiencing cash flow problems sometimes fail to pay over the withheld taxes, choosing instead to use the cash attributable to those taxes to fund operations. BIG MISTAKE. If an employer’s business ultimately fails and cannot pay the IRS the withheld taxes, the IRS will seek to collect them from any “responsible person” of the employer (e.g., an officer, director, shareholder (or other owner), or bookkeeper with signature authority over a bank account). This personal liability for the “responsible person” can be substantial. Moreover, in rare cases the IRS may seek criminal prosecution.
Mr. Easterday was the principal of a corporation that operated a number of nursing homes throughout Northern California. Between 1998 and 2005, the corporation and its subsidiaries accumulated a nearly $45,000 payroll tax liability, approximately $25,000 of which was paid. The corporations’ tax returns accurately stated their tax liability, but the corporations failed to pay over the actual taxes to the IRS. Mr. Easterday admitted that the companies in question had failed to pay over their payroll taxes, but claimed that he and his companies lacked the financial capacity to meet their tax obligations.
In response to the companies’ and Mr. Easterday’s failure to pay over their payroll taxes, the IRS charged Mr. Easterday with 109 counts of failure to pay over payroll taxes in violation of Section 7202 of the Internal Revenue Code. Each count represented a different quarter in which the payroll taxes went unpaid. At trial, Mr. Easterday’s witnesses testified that the companies’ did not pay their payroll taxes because those funds were needed to keep the nursing homes at issue operational. In light of this testimony, Mr. Easterday asked the court to instruct the jury that it had to find that his violation of Section 7202 had not been willful if the jury found that he lacked the ability to pay the payroll taxes due to the IRS. The trial court declined to give requested instruction, and the jury convicted Mr. Easterday.
On appeal, the Ninth Circuit affirmed the decision not to provide the jury instruction Mr. Easterday requested. The Court held that, although the statute requires a person to willfully violate the statute to be guilty of a Section 7202 offense, willfulness does not require the defendant to have the ability to pay the payroll taxes in question. Instead, the Court concluded that the willfulness required by Section 7202 merely constitutes a knowing and voluntary violation of one’s obligation to pay over payroll taxes to the IRS. In addition, the Court noted that Mr. Easterday’s position did not make sense when he could simply escape liability for paying over funds owed to the Government by claiming that they had been spent on something else. Thus, the Court recognized that the payroll taxes in question were the property of the United States and were simply being held in trust by Mr. Easterday until such time as they were to be disbursed to the IRS.
Pursuing payroll tax criminal penalties is becoming more and more common with the IRS. If you find yourself in a pickle and owe employment taxes, you will need a professional to take care of the issue with the IRS before it gets to a criminal status.
Tax resolution seems to be the new buzz word in the tax industry. You have probably heard it, and wondered what tax resolution was. This article will delve directly into exactly what tax resolution is, the primary companies that do this kind of work, and the usefulness of the industry. In 2013, I formed a company named Tax Crisis Center®, LLC. Tax Crisis Center® is a tax resolution company. I got into the tax resolution business because it is a very nasty business and it doesn’t need to be. Many companies owners have gone to prison and been stripped of their licenses for taking people’s money and never doing anything. In this article we will run the gambit of this business and explore it inside and out.
We should begin with the definition of tax resolution. Tax resolution is to resolve someone’s tax debt. A taxpayer owes the IRS or the State money, and a tax resolution firm specializes in representing a taxpayer’s interest before the IRS or the State to resolve the debt in the most advantageous way for the taxpayer. Owing the IRS is worse than owing the mafia. The IRS can take EVERYTHING that you own to satisfy a debt, and they scare and intimidate most people. People that have either a tax lien filed against them, wage garnishment, or bank levy know all too well what the IRS can do, and what they can’t do.
Let’s talk about how people get into these situations to begin with. In April taxpayers all over the country file their tax returns. In my experience as a tax professional, if you have waited to file your tax return until April, you have been putting it off because you know that you owe the IRS money. Some people will put it off even longer by filing an extension in April, prolonging their fate until October. Nevertheless, when a tax return is filed, and an amount is due, the IRS will assess the tax owed. The date of assessment is very important. The IRS has ten years from the date of assessment to collect the tax that is owed. This is known as the Statute of Limitations. There are many things that you can do as a taxpayer to extend this time that the IRS has to collect the tax, but for now let’s discuss the ten year time frame. Once the tax is assessed, the IRS will send an initial notice to the taxpayer stating that an amount is due. If a payment isn’t made, then 30 days later, the IRS will send a more serious notice stating that an amount is due. If payment isn’t made the IRS will send a certified letter called an Intent to Levy Notice. This notice states that the IRS will levy the taxpayer’s assets if arrangements are not made to pay the tax. If nothing is done after that the IRS will send a notice 30 days later stating that they will levy the taxpayer’s State Refund. If nothing is done, 30 days later the IRS will send a Final Intent to Levy. This is the serious letter, and if not answered within 30 days, the IRS will place a lien on the taxpayer.
When is lien is placed on the taxpayer it does a couple of things. First it effects the taxpayer’s credit rating. Secondly, it allows the IRS to begin forcible collection of the tax that is due. The IRS can levy your bank account, meaning that the IRS will send notice to your bank stating that you owe them money and they want the bank to take that amount out of your account. The bank will place a hold on your funds for a period of 21 days. After 21 days the IRS will then collect their claim. The IRS can garnish your wages. What this means is that the IRS will send your employer a letter stating that each time you get paid they will take a certain amount of money for a specific period of time. If you are self-employed the IRS can seize your accounts receivable, and notify your clients or customers that you have a tax lien and they will need to make payments to them instead of you. The IRS can show up at your home, and go through your assets in your house, and can have a public auction to sell your furniture, and other assets that you have in your home. Depending on the State that you live in, the IRS can also seize you home and sell it at auction to satisfy your debt. A tax lien is nothing to play around with.
Back in the 60’s, 70’s, 80’s and most of the 90’s the IRS abused their power so much that in 1998 there were Congressional Hearings that were held. Out of these hearings came the Taxpayer Bill of Rights. You have rights now. Probably the most important right you have is the right to appeal the IRS’s collection of taxes, and the outcome of an audit. For example, when the IRS sends the Final Intent to Levy Notice, you have 30 days to appeal the collections actions. Most people don’t know that. Even after the 30 days, you have limited appeal rights, and you have a right to a Collections Due Process Hearing. At this hearing you can protest the amount you owe, come up with payment alternatives, if the collection of the tax resulted from a tax audit that you didn’t agree to, you can ask for the case to be thrown back into audit. There are a number of things that you can do. This is what Tax Resolution Companies specialize in.
In order to be in the Tax Resolution business you have to be licensed. To prepare a tax return, you don’t need a license, but to represent a taxpayer, in most cases you do. An Enrolled Agent, Certified Public Accountant, or Attorney can represent your interests, without restrictions before the IRS. Some Enrolled Agents and CPA’s can even represent your interests before the United States Tax Court.
Tax Resolution is a nasty business to be in. From the professional’s side you are dealing with different clientele than you normally do. For instance, my tax practice caters to clients that have a high net worth. Dealing with them, is completely different than dealing with a tax resolution client. Now, before I say this I do want to state that about 1 percent of the tax resolution clients that I have dealt with are just people that found themselves in this situation by accident. The other 99 percent just simply ignored the IRS when they were asking for money. They won’t pay the most notorious collection agency in the world, so you have to get a majority of your money upfront in this business or you won’t get paid. However, there are many unethical professionals in this business. Since a lot of money is taken upfront, some companies will just steal the money from the client. They will promise that they will help, but at the end of the day they just steal client’s money. A lot of them get shut down because of this. There are hundreds of tax resolution companies, which is why if you find yourself in a situation where you need one, do your homework before you hire them. Their famous pitch to every potential client is that they can settle their debt for pennies on the dollar. In all reality, what they are talking about is something called an Offer in Compromise. 18 percent of all offers are accepted. That’s it.
This was the main reason why I formed Tax Crisis Center®, LLC a year ago. For 19 years I was a partner in an accounting practice. In 2013, I went out on my own. Tax Crisis Center® was an idea that I pitched over and over again to my partner, but he wanted nothing to do with it. The concept behind Tax Crisis Center® is to be an honest firm in the midst of all of these other firms that just basically promise clients the world, and then steal from them. I have lost potential clients, because I tell them the truth. If I don’t think they are a candidate for an offer, I don’t file one. Filing an offer you have to give the IRS a lot of personal information like bank account numbers. So, if the offer isn’t accepted, you have just told the IRS where the money is so they can seize it whenever they want. You have told them the assets that you have, so they can take those as well. For me it isn’t about the money, it is helping clients. Our trademarked slogan is Let YOUR Voice Be Heard™.
Now you know what Tax Resolution is, and if you ever need help resolving a tax debt, put Tax Crisis Center® to work, for you.
Have you ever wanted to know what your chances are of being audited by the Internal Revenue Service? The IRS has issued its annual data book, which provides statistical data on activities conducted by IRS from Oct. 1, 2012, to Sept. 30, 2013, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance and IRS’s budget and workforce. In addition, the data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections.
The annual book is jam-packed with information. For instance, during fiscal year 2013, the IRS collected almost $2.9 trillion in revenue. They also processed 240 million returns. The interesting part is that only 151 million of those were filed electronically. Out of the 146 million individual tax returns that were filed approximately 83% were e-filed. One the 118 million individual income tax return filers received a tax refund. Tax refunds told $312.8 billion. An interesting fact, is that on average the IRS spends 41 cents to collect $100 in tax revenue. This matches the low-cost results for 2008 and 2001.
Now for the good stuff. What are your chances of being audited? During fiscal year 2013, the Internal Revenue Service examined 0.8% of all returns of a filed in calendar year 2012. About 1% of all individual income tax returns were filed in calendar year 2012, and 1.4% of corporation returns were audited. Overall, individual income tax returns and higher adjusted gross income classes were more likely to be examined the returns and lower adjusted gross income class. This brings up an interesting point, the IRS does not seem to waste their resources on people in lower tax brackets. The reason for this, is that they can obtain more revenue through audited taxpayers with higher income. It’s a numbers game.
The next interesting fact is that the returns that were audited 24.5% were audited by revenue agents, tax compliance officers, tax examiners, and revenue officer examiners. 75.5% of the returns were audited were handled via correspondence audit. That means by the mail.
For all corporate returns (other than Form 1120-S), the audit rate in 2013 was 1.4% (down from 1.5% in the previous year). For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, the rate was 1.3%; for $1 to $5 million, the rate was 1.4%; and for $5 to 10 million, the rate was 2.0%. For FY 2012, the percentages were, respectively, 1.7%; 2.1%; and 2.6%.
For large corporations with returns showing total assets of: $10 to $50 million, the audit rate was 7.0%; for $50 to $100 million, the rate was 15.5%; for $100 to $250 million, the rate was 19.4%; for $250 to $500 million the rate was 22.5%; for $500 million to $1 billion, the rate was 27.5%; for $5 billion to $20 billion, the rate was 60.9%; and for $20 billion or more, the rate was 91.2%. For FY 2012, the percentages were, respectively, 10.5%; 20.7%; 23.2%; 22.7%; 22.7%; 31.4%; 45.4%; and 93.0%.
It is really interesting to know what the facts are.